Image Source: Verint
Simulated Best Ideas Newsletter portfolio idea Verint turned in a solid fiscal first quarter report June 7 as ongoing demand strength drove its top line higher. The company’s transition to a more software-focused business model is expected to continue expanding margins. Verint is a unique play on cybersecurity.
By Kris Rosemann
Simulated Best Ideas Newsletter portfolio idea Verint (VRNT) continues to ride a wave of strong demand for its offerings in both its ‘Customer Engagement’ and ‘Cyber Intelligence’ segments to a growing top line, expanding margins, and solid cash flow generation. In its fiscal first quarter report, results released June 7, the company reported non-GAAP revenue growth of 10% from the year-ago period, driven by 8% growth in ‘Customer Engagement’ (65% of revenue in the quarter) and 13% growth in ‘Cyber Intelligence’ (35% of revenue).
Management notes three key trends in its ‘Customer Engagement’ segment that are keeping demand high and could accelerate growth over time. The first is the trend of customer engagement becoming an enterprise-wide initiative for companies and the desire for simplification of such initiatives. The second is enterprise demand for modernization and migration to the cloud while preserving past investments. Verint believes it is effectively differentiated in this space thanks to the flexibility it offers via its public, private, and hybrid cloud offerings, which allow companies to modernize at their own pace. The third key trend is organizations using automation to elevate the customer experience while simultaneously reducing costs.
The strong growth Verint reported in its ‘Cyber Intelligence’ segment reflects ongoing demand for its security and data mining software, and an uptick in large deals gives credence to its ability to anticipate market trends and bring innovative offering for the evolving challenges faced today. Three market trends are in place that have the potential to accelerate the segment’s revenue growth moving forward, the first of which is the increasing complexity of security threats. The second trend is a shortage of data scientists and cyber analysts as organizations seek advanced automation to replace functions previously done by humans. Finally, security organizations are looking to predictive intelligence, in which Verint has a unique leg up thanks to its security and data mining software deployments already giving it customer relationships in more than 100 countries and providing it with insights into current and future challenges.
Verint’s non-GAAP diluted earnings per share expanded to $0.53 in its fiscal first quarter from $0.49 in the year-ago period. The company’s product, services, and revenue mix can cause margin fluctuations on a quarterly basis, but it expects ongoing margin expansion as a result of its transition to a more software-focused business model, which should also drive recurring revenue higher as a percentage of total revenue, and efficiencies of scale. Cash flow from operations in the first quarter was roughly flat on a year-over-year basis at ~$60 million, and free cash flow retreated by ~2% to $51 million as a result of higher capital spending in the quarter.
Net debt (including unamortized debt discounts and issuance costs and excluding long-term restricted cash, cash equivalents, and time deposits) was ~$398 million at the end of the quarter, down from $445 million three months earlier. Management classified the recent report from the Wall Street Journal that it is in talks to buy Israeli cybersecurity firm NSO Group as “rumors,” but it did note that it would be willing to temporarily lever up for the right acquisition as its financial leverage is currently less than 2x EBITDA.
Verint reiterated its guidance for the fiscal year ending January 2019, which includes mid-single digit revenue growth in its ‘Customer Engagement’ segment and 10% revenue growth in its ‘Cyber Intelligence’ segment. Total revenue is expected to be $1.23 billion, or ~7% year-over-year growth, and non-GAAP earnings per share are expected to be ~$3.09, compared to $2.81 in the previous year. We like Verint’s position in the simulated Best Ideas Newsletter portfolio as a unique idea on cybersecurity.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.